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August 4, 2010Client Alert

Pasture Lien Takes Priority Over Previously-Filed Security Interest

In its decision in Premier Community Bank v. Schuh (2009 AP1722), the Wisconsin Court of Appeals determined that a pasture or keeper lien has priority over a bank’s previously-perfected security interest.

Schuh kept and pastured others’ livestock on his farm, including cattle owned by Schuh Cattle Company, LLC (“SCC”), whose membership included Schuh’s son and daughter-in-law. In exchange, SCC agreed to pay Schuh $1.10 per day per animal. Although Schuh demanded payment many times, SCC had not paid him for an extended period.

SCC had used the livestock pastured on Schuh’s farm as collateral for a loan from Premier Community Bank. Premier filed a Uniform Commercial Code (“UCC”) financing statement to perfect its lien. Subsequently, when SCC defaulted, Premier demanded the livestock from Schuh. Schuh refused, asserting a possessory lien in the cattle. Premier filed suit to enforce its security interest. The Trial Court concluded that Schuh had a possessory lien with priority over Premier’s security interest. The Court of Appeals agreed.

Typically priority is determined by the simple “first in time, first in right” rule – whoever perfects a security interest first usually has priority. There are some exceptions to this rule. A previously-perfected security interest may be subordinate to the claims of third parties holding statutory or common law liens like possessory liens. Wis. Stat. § 409.33(2).

The UCC defines a possessory lien as an interest, other than a security interest or an agricultural lien:

a. Which secures payment or performance of an obligation for services or materials furnished with respect to goods by a person in the ordinary course of the person’s business;

b. Which is created by statute or rule of law in favor of the person; and

c. Whose effectiveness depends on the person’s possession of the goods.

Schuh claimed possessory lien rights pursuant to Wis. Stat. ¶779.43(3), which provides in relevant part: “[E]very person pasturing or keeping . . . animals . . . shall have a lien thereon and may retain the possession thereof for the amount due for the keep, support . . . and care thereof until paid.”

The Court interpreted this statute as creating a lien in favor of the possessor, and then allowing the lienholder to elect between retaining or relinquishing possession. If the lienholder elects to retain possession, the lien supplies legal justification for continued possession. If the lienholder elects to relinquish possession, the lien is lost. Thus, the Court concluded that a lien under Wis. Stat. ¶779.43(3) is a “possessory lien” and superior to a previously-perfected security interest.

The decision has implications for other types of collateral besides livestock. Wis. Stat. ¶779.43(3) provides for possessory liens in favor of garage keepers and marinas (both of the foregoing with some additional restrictions and priority limitations), livery or board stables, and every person pasturing or keeping any carriages, automobiles, boats, harness or animals, and every person or corporation, municipal or private, owning any airport, hangar or aircraft service station and leasing hangar space for aircraft.

Practically speaking, what does this mean? A couple of things. First, it means if you are a lender then make sure you know your borrower. Does your borrower have an arrangement with another person to grow or care for livestock on the borrower’s behalf? If so, then make sure the “grower” executes a subordination agreement or waiver to preserve your lien priority.

Second, the decision in Schuh reminds us that there is still uncertainty regarding lien priorities in Wisconsin. The Schuh decision discussed the priority of a pasture lien over a previously filed security interest by a bank. But, what the Schuh decision didn’t discuss is the relative priority of pasture liens, versus breeders liens, versus purchase money security interests versus any other kind of agricultural liens. Those questions live on so creditors beware and be careful.

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